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Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Mixed Messages

Diary, Newsletter, Research

It was definitely a week of mixed messages in the stock market.

Is Covid-19 going to disappear by itself shortly, or is it the worst thing since the black plague?

Are we going to get a $2 trillion stimulus package out of Washington, or not?

Are stocks too expensive, or still cheap?

We are being told the answers to these questions loud and clear, we just can’t hear them.

For this election looks to set all records on turnout. Every city in the country is seeing lines of voters snaking around the block waiting 2-8 hours. But which way are they voting? Are there hoards of hidden Biden voters coming out of the woodwork, or Trump ones? We won’t know the result for eight more days.

In the meantime, the markets bide their time.

Which raises one last question: how low can stocks fall over the next seven trading days?

In the meantime, some asset classes aren’t willing to sit on their hands any longer. Interest rates have started to rise, hitting a four-month high. This has knocked 15 points off of bond (TLT) prices. Yet, contrary to expectations, the US dollar is hugging a multiyear low (UUP), while commodity prices (FCX) soar.

All of this spell a record economic recovery in 2021. All that remains is for stock prices to play catch-up.

The word is that there is over $1 trillion sitting on the stock market ready to dive in the day after the election, possibly tacking on at least 10% to the major indexes by yearend. There could be one hell of a post-election celebration, no matter who wins.

Baby Boomers are unloading stocks to Gen Xers mostly, but Millennials as well. Of course, they have all the money, with a 53% ownership of all stocks, compared to 27% for Gen Xer’s and a mere 3% for Millennials. The Greatest Generation, born before 1946, have been shrinking their share ownership since 1990 and own only 17% of the total now. A coming jump in capital gains taxes will accelerate the process.

China’s Economy soared by 4.9%, in Q3 YOY with the pandemic in the rear-view mirror. First into the Coronavirus brings first out. Retail sales are through the roof and industrial production and business investment is accelerating.

Goldman Sachs says a Blue Wave will increase spending and boost the stock market. Total one-party control of the government eliminates the haggling that we are currently seeing in Washington and will deliver more Covid-19 aid faster. It should more than offset the ill effects of tax increases.

Beware of the coming Tax Loss Selling. A Biden win could unleash a torrent of selling as investors rush to beat an increase in the capital gains tax. That’s when you buy.

US Housing Permits
blow the roof off at 1.553 million, up a staggering 22% YOY and a 13-year high.  I wondered why I was suddenly getting a lot of flat tires on the freeway. They’re caused by nails and screws falling off the back up pickup trucks on the way to jobs. The long-term structural housing shortage continues. 30-year money at 2.75% makes a big difference.

Tesla generates a record profit for the fifth consecutive quarter in a row. The company is relying on its China factory to hit its 2020 target of 500,000 million units. Again, $397 million in regulatory credits drive earnings, payments from other carmakers who are lagging on electric car production. Gross margins rose 250 basis points to 23.5%. S&P 500 listing here we come! Next target $2,500!

Weekly Jobless Claims dropped to 787,000, better, but still horrible. California is finally reporting again.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
 
My Global Trading Dispatch hit a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips and a seller on bigger rallies. October has now reached to a welcome 1.89% profit.

That keeps our 2020 year-to-date performance at a blistering +36.29%, versus a LOSS of -0.57% for the Dow Average. That takes my eleven year average annualized performance back to +36.21%. My 11 year total return stood at new all-time high at +392.30%. My trailing one year return appreciated  to +42.86%.

The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 225,239, which you can find here.

On Monday, October 26 at 10:00 AM EST, New Home Sales are published. Ely Lilly (LLY) and Merck (MRK) report earnings.

On Tuesday, October 27 at 9:00 AM EST, the S&P Case Shiller Home Price Index for August is released. Microsoft (MSFT) and Pfizer (PFE) report earnings.

On Wednesday, October 28, at 2:00 PM EST, the EIA Cushing Crude Oil Stocks are out. Boeing (BA) and Visa (V) report earnings.

On Thursday, October 29 at 8:30 AM EST, the Weekly Jobless Claims are announced. At the same time, we get the first read on Q3 GDP. Alphabet (GOOGL) and Amazon (AMZN) report earnings.

On Friday, October 30, at 8:30 AM, Personal Income for September is printed. Exxon (XOM) reports earnings. At 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, I’ll be charging up every electronic device I have as the San Francisco Bay Area is expected to suffer a complete power blackout for the next three days. PG&E is shutting off the juice because winds are expected to reach 70 miles per hour and it hasn’t raised in six months.

I won’t be affected because I am totally off the grid with my own solar and battery network. You can easily find me because mine will be the only house in the mountains with the lights on.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

October 26, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2020/02/john-thomas-tesla.png 583 604 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-10-26 09:02:462020-10-26 10:52:12The Market Outlook for the Week Ahead, or Mixed Messages
MHFTF

11 Surprises that Would Destroy This Market

Diary, Newsletter, Research

Note to readers: Sorry for the short letter today but PG&E is about to turn off my electric power to reduce the risk of a wildfire during these high, hot winds from the east so I’m sending you just a few quick thoughts.

The Teflon market is back.

Bad news is good news. Good news is good news.

What could be better than that?

However, there are a few issues out there lurking on the horizon that could pee on everyone’s parade.

Risks of an asymmetric outcome right now are huge. Let me call out the roster for you.

1) The China Trade War Escalates – Every day economic advisor Larry Kudlow tells us that the trade talks are progressing nicely, and every day the administration pulls the rug out from under him with new sanctions. The last chance to avoid the next recession is upon us. A trade deal is the rational thing to do. Oops! There’s that “rational” word again.

2) Economic Data Gets Worse – After a great data run into the fall, they are suddenly rolling over. All of the forward-looking data is now 100% terrible.

3) The Fed Raises Interest Rates– This has been the world’s greatest guessing game for the past three years. Jay Powell has just promised NOT to raise interest rates for three years, so an increase would be completely out of the blue and have an outsize impact. The Fed lives in perpetual fear of the American economy going into the next recession with interest rates near zero! That would leave them powerless to do anything to engineer a revival.

3) Another Geopolitical Crisis – You could always get a surprise on the international front. But the lesson of this bull market is that traders and investors could care less about North Korea, ISIS, Al Qaida, Afghanistan, Iraq, Syria, Russia, the Ukraine, or the Chinese expansion in the South China Sea.

Every one of these black swans has been a buying opportunity of the first order, and they will continue to be so. At the end of the day, terrorists don’t impact American corporate earnings, nor do they own stocks.

4) A Recovery in Oil – The next drone attack against Saudi Arabia could send oil really flying. If it recovers too fast and rockets back to the $100 level, it could start to eat into stock prices, especially big energy-consuming ones, like transportation and industrials.

5) The End of US QE – The Fed’s $4.5 billion quantitative easing, relaunched in March, could end as soon as it gets the sense that the economy is recovering too fast. That would take the punch bowl away from the party. Anyone who said QE didn’t work obviously doesn’t own stocks.

6) A New War – If the US gets dragged into a major new ground war, in Iran, North Korea, Syria, Iraq, or elsewhere, you can kiss this bull market goodbye. Budget deficits would explode, the dollar would collapse, and there would be a massive exodus out of all risk assets, especially stocks.

7) US Corporate Earnings Collapse – They already have for the sectors of the economy where you can’t socially distance, like movie theaters, restaurants, and airlines. A much higher third wave of Covid-19 would do the trick nicely, bringing a new round of lockdowns. Do you think stocks (SPY) will notice?

8) Another Emerging Market (EEM) Crash – If the greenback resumes its long-term rise, another emerging market debt crisis is in the cards. Venezuela and Argentina are just the opening scenes.

When their local currencies collapse, it has the effect of doubling the principal balance of their loans and doubling the monthly payments, immediately.

This is the problem that is currently taking apart the Brazilian economy right now. It happened in 1998, and it looks like we are seeing a replay.

9) A Trump Victory – Since the stock market has spent the last six months discounting a Biden win, the opposite result would be a total out of the blue shock. Count on a 10% dive in the (SPY) immediately, and 20% eventually. Polls can be wrong. Who knew?

10) Inflation Returns – Steep tariff increases on everything Chinese is rapidly feeding into rising US consumer prices. What do you think the Amazon (AMZN) wage hike to $15 means? If McDonald’s (MCD), Walmart (WMT), and Target (TGT) join them, we’re there. This is a stock market preeminently NOT prepared for a return of inflation.

I know you already have trouble sleeping at night. The above should make your insomnia problem much worse.

Try a 10-mile hike with a heavy pack every night in the mountains. It works for me.

Down the Ambien, and full speed ahead!

 

A Threat to Your Portfolio?

October 23, 2020/by MHFTF
https://www.madhedgefundtrader.com/wp-content/uploads/2018/10/10032018-image.png 429 649 MHFTF https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTF2020-10-23 09:02:292020-10-23 09:36:5511 Surprises that Would Destroy This Market
Mad Hedge Fund Trader

Is Airbnb Your Next Ten Bagger?

Diary, Newsletter, Research

When the pandemic hit in February, I figured Airbnb was toast. Global travel had ground to a halt, and competitors like Wynn Resorts (WYNN) and Hyatt Hotels (H) saw their share prices plunge to near zero.

Instead, the opposite happened.

While the big hotels continue to roast in purgatory, Airbnb catapulted to a new golden age, and how they did it was amazing.

They turned all travel local. Instead of recommending that I visit Cairo, Tokyo, or Rio de Janeiro, they suggested Carmel, Monterey, or Mendocino, all destinations within driving distance. It worked, and the company is now moving from strength to strength.

My neighborhood in Incline Village, NV was almost always deserted outside of holidays. Now it is packed with Airbnber’s awkwardly moving in every Friday only to flee on Sunday.

As a result, Airbnb promises to be one of the biggest IPOs of 2021. And while the pickings have been thin lately, the world’s largest hotel deserves some close inspection.

How would you like to get a 90% discount on all of your luxury hotel accommodations?

During my most recent trip to Dubrovnik in Croatia, I rented an 800-square foot, two-bedroom, two-bath home inside the city walls for $300 a night.

A single, cramped 150 square foot room in the nearest five-star hotel was $600 night.

All that was missing was room service, a hand out for a big tip, and a surly attitude.

Sounds like a massive, game-changing disruption to me.

Thank you, Airbnb!

I was not surprised to hear that the home-sharing app, Airbnb, was given a $31 billion valuation in the latest venture capital funding round.

The big question for you and me is: Will the valuation soar tenfold to $300 billion, and how much of a piece of that will you and I be allowed to get?

To answer that question, I spent six weeks traveling around the world as an Airbnb customer. This enabled me to understand their business model, their strengths and weaknesses, and analyze their long-term potential.

As a customer, the value you receive is nothing less than amazing.

I have been a five-star hotel client for most of my life, with someone else picking up the tab much of the time (thank you, Morgan Stanley!), so I have a pretty good idea on the true value of accommodations.

What you get from Airbnb is nothing less than spectacular. You get three or four times the floor space for one-third the price. That’s a disruption factor of 7:1.

The standards are often five-star and at the top end depending on how much you spend. I found out I could often get an entire three-bedroom house for the price of a single hotel room, with a better location.

Or, I could get an excellent abode in rural settings, where none other was to be had, whatsoever.

That’s a big deal for someone like me who spends so much of the year on the road.

You also get a new best friend in every city you visit.

On most occasions, the host greeted me on the doorsteps with the keys, and then introduced me to the mysteries of European kitchen appliances, heating, and air conditioning.

Pre-stocking the refrigerator with fresh milk, coffee, tea, and jam seems to be a tradition the hosts pick up in their Airbnb orientation course.

One in Waterford, Ireland even left me a bottle of wine, plenty of beer, and a frozen pizza. She read my mind. She then took me on a one-hour tour of their city, divulging secrets about their favorite restaurants, city sights, and nightspots. Everyone proved golden. Thanks, Mary!

After you check out, Airbnb asks you to review the accommodation. These can be incredibly valuable in deciding your next pick.

I had one near miss with what I thought was a great deal in London, until I read, “The entire place reeks of Indian cooking.”

Similarly, the hosts rate you as a guest.

One hostess in Dingle, Ireland shared a story about picking up her clients from town after they got drunk and lost in the middle of the night. Then they threw up in the back of the car on the way home.

Guests forgetting to return keys are another common complaint.

Needless to say, I received top ratings from my hosts, as fixing their WIFI to boost performance became a regular and very popular habit of mine.

After my initial fabulous experience in London, I thought it might be a one-off, limited to only the largest cities. So, I started researching accommodations for my upcoming trips.

I couldn’t have been more wrong.

Just the Kona Coast on the big island of Hawaii had an incredible 50 offerings, including several bargain beachfront properties.

The center of Tokyo had over 300 listings. The historic district in Florence, Italy had a mind blowing 351 properties.

Fancy a retreat on the island of Bali in Indonesia and tune up your surfing? There are over 197 places to stay!

Airbnb has truly gone global.

Airbnb’s business model is almost too simple to be true, involving no more than a couple of popular applications. Call it an artful melding of Google Earth, email, text, and PayPal.

While no one was looking, it became the world’s largest hotel at a tiny fraction of the capital cost.

The company has 2 million hosts worldwide, and 100 million customers. That supply/demand imbalance shifts burden of the cost to the renters, who usually have to fork out a 12% fee, plus the cost of the cleaning service.

Hosts only pay 3% to process the credit card fees for the payment.

The tidal wave of revenues this has created has enabled Airbnb to become San Francisco’s largest privately owned “unicorn”,

To say that Airbnb has created controversy would be a huge understatement.

For a start, it has emerged as a major challenge to the hotel industry, which is still stuck with a 20th century business model. There’s no way hotels can compete on price.

One Airbnb “super host” in Manhattan at one point managed 200 apartments, essentially, creating out of scratch, a medium sized virtual “hotel” until the city caught on to them.

Taxes are another matter.

Some municipalities require hosts to pay levies of up to 20%, while others demand quarterly tax filings and withholding taxes. That is, if tax collectors can find them.

Airbnb may be the largest new source of tax evasion today.

In cities where housing is in short supply, Airbnb is seen as crowding out local residents. After all, an owner can make far more money subletting their residence nightly than with a long-term lease.

Several owners told me that Airbnb covered their entire mortgage and housing cost for the year, while paying off the mortgage at the same time.

Owners in the primest of areas, like mid-town Manhattan off of Central Park, or the old city center in Dubrovnik, rent their homes out as much as 180 days a year.

It is doing nothing less than changing lives.

That has forced local governments to clamp down.

San Francisco has severe, iron-clad planning and zoning restrictions that only allow 2,000 new residences a year to come on the market.

It is cracking down on Airbnb, as well has other home sharing apps like FlipKey, VRBO, and HomeAway, by forcing hosts to register with the city or face brutal $1,000 a day fine.

So far, only 1,675 out of 9,000 hosts have done so.

Ratting out your neighbor as an off the grid Airbnb member has become a new cottage industry in the City of the Bay.

Airbnb is fighting back with multiple lawsuits, citing the federal Communications Decency Act, the Stored Communications Act, and the First Amendment covering the freedom of speech.

It is a safe bet that a $31 billion company can spend more on legal fees than a city the size of San Francisco.

The company has also become the largest contributor in San Francisco’s local elections. In 2015, it fought a successful campaign against Proposition “F” meant to place severe restrictions on their services.

An Airbnb stay over is not without its problems.

The burden of truth in advertising is on the host, not the company, and inaccurate listings are withdrawn only after complaints.

A twenty something year old guy’s idea of cleanliness may be a little lower than your own.

Long time users learn the unspoken “code”.

“Cozy” can mean tiny, “as is” can be a dump, and “lively” can bring the drunken screaming of four letter words all night long, especially if you are staying upstairs from a pub.

And that spectacular seaside view might come with relentlessly whining Vespa’s on the highway out front. Always bring earplugs and blindfolds as backups.

Researching complaints, it seems that the worst of the abuses occur in shared accommodations. Learning new foreign cultures can be fascinating. But your new roommate may want to get to know you better than you want, especially if you are female.

In one notorious incident, a Madrid guest was raped and had to call customer service in San Francisco to get the local police to rescue here. The best way to guard against such unpleasantries is to rent the entire residence for your use only, as I do.

Another problem arises when properties are rented out for illegal purposes, such as prostitution or drug dealing.

More than once, an unsuspecting resident woke up one morning to discover they were living next door to a new bordello.

Wild parties that trash the dwelling, annoy the neighbors, and bring in the police is another worry. One such event in my San Francisco neighborhood resulted in a shoot-out that left five dead. Airbnbs are now banned in that area.

Of course, the million-dollar question is “When will the company go public?”

The current “unicorn” philosophy is to milk the company for all its worth, and take it public when it is about to go ex-growth.

That’s what happened to Twitter (TWTR), which grew exponentially, and then saw shares dive a gut-churning 72% after its initial public offering.

On seeing the massive crowds of new tourists packing Europe last summer, my conclusion is that the travel industry is entering a hyper-growth phase. Blame the emerging middle-class Chinese who seem to be everywhere.
 
That means that whatever price Airbnb goes public at, there may not be a ten bagger left for you.

But a two or three bagger may be possible.

The real shock came when I left Airbnb and stayed in a regular hotel. Include the fees and the cleaning charges, and the service is no longer competitive for a single night stay. Total costs now regularly run double the posted one-night price.

In any case, most hosts have two or three night minimums to minimize hassle.

When I checked in at a Basel, Switzerland five-star hotel, all I got was a set of keys and a blank stare. No great restaurant tips, no local secrets, no new best friend.

My New Best Friend

October 22, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2016/07/Airbnb-Hostess-e1468963965771.jpg 400 393 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-10-22 09:02:482020-10-22 09:25:20Is Airbnb Your Next Ten Bagger?
Mad Hedge Fund Trader

Why You Must Avoid all EV Plays Except Tesla

Diary, Newsletter, Research


Markets live on fads. Once a certain investment theme takes hold, the imitators start coming out of the woodwork in droves.

In 1989, all of the largest Japanese banks stampeded to issue naked short put options on the Nikkei Average by the billions of dollars when the index was at an all-time high. It then fell by 85%.

I remember signing the paperwork on a $3 billion deal for the Industrial Bank of Japan on behalf of Morgan Stanley. It’s been 31 years, but I’m still waiting for those investors to come after me.

Then there was the peak of the Dotcom Bubble in 2000 and no less that five online pet food delivery companies raised billions. (remember those cute sock puppets?) Every one of them went under.

So, what has been one of the biggest fads of 2020?

That would be electric vehicles.

You no longer have to wear Birkenstocks, grow your hair long, and smoke pot to drive an electric car. They are about to become a major part of the American economy. According to Adam Jonas at Morgan Stanley, EVs account for 1.3% of the total car market today and will grow to 10% by 2025 and 25% by 2030.

I have been involved in Tesla since its earliest days back in 2003. Then it was one rich man’s hobby, with technology that was a reach at best, and unlikely to ever see the light of day as a public company. There it remained for seven years.

Then they brought out the Model S in 2010, which I snapped up as fast as I could, picking up chassis no. 125 at the Fremont factory. My signature is still on the wall there. If it worked this had the potential to be a real car. If it didn’t, I would wind up with $100,000 worth of inert aluminum, steel, silicon, rubber, and copper.

The trials were then only just beginning for Musk. He faced nervous breakdowns, sleeping in factories, and SEC prosecutions. After a decade of abuse, suddenly everything clicked. Total Tesla production soared to over one million units and the shares leaped 150-fold to $500 from their post IPO low of $3.30. That move financed a lot of retirements among my readers.

I remember what Steve Jobs once told me; “Like many overnight successes, this one took decades to pull off.”

Suddenly, making electric cars looked easy. Raising money to finance them looked even easier.

Enter the hoards, which I list below, a roll call of the shameless:

Nikola Badger – Roll out is expected in 2021 and has a hydrogen fuel cell power source that hasn’t a hope in hell of ever becoming economic. As I never tire of explaining to investors, while electric power is digital and scalable, hydrogen is analog and isn’t. Maybe that’s why the stock is down 83% since June. Too many unbelievable promises and no actual functioning model. Gravity was their only actual power source.

Fisker – If at first, you don’t succeed, why not fail again? This had double the number of parts of a conventional international combustion engine. Its chief claim to fame was that it got a free factory from the government in Joe Biden’s home state and the fact that Justin Bieber drives one. More flailing at the wind.

Aspark Owl – A $3.2 niche supercar with appeal to maybe three car collecting Saudi princes.

Bollinger B1 – Is a $125,000 SUV expected from a Michigan startup with only a 200-mile range. Why not pay nearly double the cost of a Tesla Model X and get half the performance?

The Byton M-Byte – Is a $45,000 crossover car from a Chinese start up. China has actually been building electric cars longer than Tesla, but they have a tendency to breakdown or catch on fire. Quality and safety problems have until now kept them out of the US, and probably always will.

Genesis Essentia – A Croatian-based startup with a major investment from South Korea’s Hyundai. It will most likely never get off the drawing board. The last time Croatia built cars was for the Austria Hungarian Empire during WWI.

Rivian R1T – A startup with a reasonably priced truck and up to 400 miles of range that will only make it because they have a 100,000-unit order from the largest shareholder, Amazon (AMZ). It’s perfect for local deliveries.

By now, virtually every major car manufacturer has or is about to roll out its own entry in the electric car race. I list them below, skipping those that are more than two years out over the horizon. Notice the profusion of the letter “e” in the names.

They include the Porsche Taycan, Audi eTron, Jaguar I-Pace, Austin Mini Electric, Fiat 500e, Kia Niro EV, BMW i3, Chevy Bolt EV, Hyundai Kona Electric, and the Hyundai Ioniq Electric, Ford F-150 Electric, Ford Mustang Mach-E, and Nissan Ariya.

Not one of these comes even close to the price/performance and battery density of the Tesla cars. Tesla is a decade ahead of the competition and is accelerating its lead. At best, they will sell a few electric cars to those who are intensely loyal to their brands and lose money doing it.

In the meantime, Tesla hasn’t been sitting on its hands. Elon Musk plans to bring out a $25,000 model in two years that will bar entry to the field any other competitor. It is bringing out its own $250,000 supercar, the Tesla Plaid, which will go zero to 60 MPH in 1.9 seconds and have a 600-mile range. The Tesla Cyber Truck at $40,000 has the specs to take on the enormous US pickup market. Did I mention that the company is on the verge of developing technology that will improve battery performance by a staggering 20-fold?

So Tesla is branching out to suck up every profit in every branch of the entire global auto industry.

And this is what most traders, especially the short sellers, got wrong about Tesla. The data is worth more than the car. The miles driven provide a springboard from which the company can offer very high value-added and profitable services, like autonomous driving. Not even Alphabet (GOOGL) can replicate this.

When I bought my first Tesla more than a decade ago, I knew I was betting on the company. The big risk was that General Motors (GM) would step in with their own cheap electric car and drive Tesla out of business.

In the end (GM) did that, but too little, too late. It’s Chevy Bolt EV didn’t hit the market until the end of 2016. Today, it offers a boring design, lacks autonomous driving, possesses only a 259-mile range for $36,620, and is subject to recall, thanks to recurring battery fires (click here for the link).

The quality is, well, Chevy quality.

This year, Chevy will sell under 20,000 Bolts. Tesla is approaching 500,000. It’s too late to close the barn door after the horse has “bolted,” as GM is earning. Over the past decade, Tesla shares are up 150 times. GM shares are nearly unchanged during the greatest bull market of all times.

It is competing against Teslas that are 20 years from the future, are fully autonomous, goes to street-to -treet autonomous driving next year, and upgrades itself once or twice a month.

Make mine Tesla, please, which will soon become the world’s first trillion dollar car company. Don’t waste your time or money on the others, either as a driver or investor.

 

 

October 21, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2018/10/New-Tesla.png 455 647 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-10-21 09:02:372020-10-21 14:40:03Why You Must Avoid all EV Plays Except Tesla
Mad Hedge Fund Trader

Why SPACs are a Scam

Diary, Newsletter, Research

Every investment bubble creates its own special instruments of destruction and this one is no different.

There were highly touted leveraged commodity and gold funds during the seventies, portfolio insurance during the eighties, money-losing tech companies with lots of “eyeballs” in the nineties, and subprime lending in the 2000s.

In this cycle, we have the Special Purpose Acquisition Company, otherwise known as a “SPAC.”

The goal of an SPAC is to raise money first on some generalized investment theme and then merge with a target company to achieve those goals.

SPACs have their advantages for some people. It enables start-up companies with no track record to go public fast without the costs and regulatory scrutiny of the burdensome IPO process. Promoters promise to get investors into the next Amazon (AMZN) or Facebook (FB) early.

Easier said than done.

Some $42 billion has been raised for SPACs in 2020, the largest being hedge fund manager Bill Ackman’s Pershing Square Tontine Holdings Ltd. (PSTH) at $4 billion. There is even an SPAC for SPACs, the Defiance Gen SPAC-Derived ETF (SPAK).

The performance of SPACs so far has been dismal. There have been 315 SPACs created since 2015. Only 93 managed to invest their funds in a target company and only 29 of those have produced a profit. This was during one of the greatest runaway bull markets of all time.

You would have done better by simply buying the cheapest Vanguard index fund. In the meantime, the issuers of SPACs, for the most part, became wealthy.

The quality of the management who had stepped forward to run SPACs has been mixed at best, including Ackman himself, who recently ran two gargantuan money-losing years back to back. They include former House Speaker Paul Ryan and NBA Hall of Famer Shaquille O’Neil, not exactly known as financial wizards.

Then there’s Nikola, an electric/hydrogen vehicle company that has promised to take on Elon Musk, unfazed by the complete lack of a functioning vehicle. These shares have cratered by 83% since their market peak.

SPACs reflect a problem endemic in investing today. The appetite for risk is enormous. With stocks at all-time highs, interest rates at zero, and the Fed flooding global markets with cash, investors are more than ready to leap at the latest shiny new thing.

The risks and limitations of SPACs are legion. You are essentially betting on the good faith and judgment of a single individual unmoored by any filings with the SEC. There are no guarantees they can achieve anything. These disclosures to the government are there to protect you. Without them, you are dancing naked.

The conflicts of interest are enormous. SPAC issuers get to buy the equivalent of call options on their funds at deep discounts prior to issue. When issuers make fortunes overnight with little money upfront you want to run a mile.

And here is the big problem with SPACs. They are essentially roach motel investments, easy to check in but impossible to check out. Liquidity going in is unlimited but coming out is nil. You can often only redeem your investment at a huge discount, or if another buyer is willing to take out at any price. That makes marks to market challenging at best.

Suffice it to say that if PT Barnum were working in the financial markets, he’d be up to his eyeballs in SPACs.

Personally, I’ll give them a pass. You should too.

 

 

 

 

The Problem is that it’s a Dummy

October 20, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2020/10/spacIPO-e1603197910863.png 238 450 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-10-20 09:02:542020-10-20 09:19:45Why SPACs are a Scam
Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Why the Next Two Weeks are a Write-Off

Diary, Newsletter, Research
buy leaps

You can pretty much write off trading for the next two weeks.

The election has been decided. It’s going to be a scandal a day in the media, but everyone has already made up their minds. All attention will be devoted to politics at the expense of trading, investment, and research. In the end, the president will lose by more than 15 million votes. All that is left but the imprimatur of the Electoral College.

Yet the Democrats are not declaring victory, with the memory of the 2016 debacle too fresh, when overconfidence and complacency ruled.

The few who are trading are jockeying around to position for the 2021 market. That means keeping big tech and adding to positions in domestic recovery and industrial stocks, like banks, couriers, railroads, and drug companies.

Tech will keep rising because of the catapult into the future provided by the pandemic yet to be reflected by share prices. Domestic industrials will see a recovery that is normal when coming out of a tradition recession, or Great Depression.

But they are doing so hesitantly, with little conviction.

After all, there are national elections in two weeks.

As for me, I have limited myself to the cautious two positions, one long in Visa (V) and one short in the S&P 500 (SPY), both of which are making money.

So, it is a good time to do your research, build your short lists of stocks to buy, and gird your loins. The main event begins after November 3.

Markets jumped on stimulus hopes. Investors don’t really care if stimulus happens before or after a Biden win. They’re buying now. And Biden will almost certainly double up spending later in the year.  No dips for latecomers. The post-election market melt-up has begun and new highs beckon. Fears of election disruption have vaporized.

Markets just entered the strongest six months of the year. It’s the inverse of sell in May and go away. October to May portfolios have yielded 64% annually for the past 20 years, while May to October investments yield exactly 4%. It traces back to America’s agricultural cycle of a century ago. Take every tailwind you can find.

The IMF predicted negative 4.4% growth for 2020, the worst since the Great Depression. Believe it or not, this is an upgrade from more dismal numbers. By comparison, the 2008-09 Great Recession brought only a 0.1% drawdown. If the US passes another stimulus package, it will recover its 2019 GDP in 2021 instead of 2022.

The new 5G iPhone is out! After a year of speculation, we get a better screen, improved camera, and magnetic charging for $999. The stock dumped on a classic “buy the rumor, sell the news.” Also out is a new mini iPhone for $699. Your neighborhood won’t have 5G for a year. Buy Apple (AAPL) on dips.

The US PC market saw best quarter in a decade, with millions of new home offices joining the fray. Some 71.4 million computers were shipped in Q3, up 3.6% YOY. Think enormous demand for new chips. Buy (AMD), (MU), and (NVDA) on dips.

Used car prices are soaring, jumping the most since 1969, and lifted the Consumer Price Index by 0.2% in September. It’s the fourth straight month of increasing inflation.

Ships are backed up in Los Angeles waiting to unload. America’s import boom and soaring trade deficit with China leaves no available dock space on the west coast. It’s another sign of a recovering economy.

US Producer Prices pop in September bringing the first YOY gain since March. They were up 0.4% following a 0.3% gain in August. Another sign of a recovering economy.

Weekly Jobless Claims ballooned to 898,000, now that California is reporting again. Not what you want to see going into an election. A slowing economy and spreading virus don’t help either. Some 25.5 million Americans are out of work.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
 
My Global Trading Dispatch hit a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips and a seller on bigger rallies. October has now reached to a welcome 1.61% profit.

That keeps our 2020 year-to-date performance at a blistering +36.11%, versus a gain of 0.3% for the Dow Average. That takes my eleven-year average annualized performance back to +36.13%. My 11-year total return stood at a new all-time high at +392.02%. My trailing one-year return appreciated to +42.67%.

The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 219,679, which you can find here.

On Monday, October 19 at 8:30 AM EST, the IMF/World Bank virtual annual meeting starts, so we can expect Fed speakers every day. (IBM) reports earnings.

On Tuesday, October 20 at 8:30 AM EST, Housing Starts for September are announced. Netflix (NFLX) reports earnings.

On Wednesday, October 21 at 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.  At 2:00 PM EST,  the Fed Beige Book is published, a transcript of the Federal Open Market Committee meeting from six weeks ago. Tesla (TSLA) reports earnings.
change.

On Thursday, October 22 at 8:30 AM EST, the Weekly Jobless Claims are announced. At 10:00 AM EST Existing Home Sales for September are out. AT&T (T) reports.

On Friday, October 23, at 2:00 PM, we learn the Baker-Hughes Rig Count. American Express (AXP) reports earnings.

As for me, I saw a curious thing driving back from Lake Tahoe this weekend. Usually, I see a never-ending parade of out of state license plates moving to the Golden State.

This time, I saw telephone poles coming in by the truckloads, hundreds of them. These are to replace the many burned down in the horrific wildfires that incinerated an area the size of Connecticut. Apparently, California has run out of telephone poles.

Is there a public stock for a company that sells telephone poles?

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

buy leaps

October 19, 2020/by Mad Hedge Fund Trader
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MHFTR

How to Gain an Advantage with Parallel Trading

Diary, Newsletter, Research

One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.

A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?

It loaded the boat with the shares of Ford Motors (F).

When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.

“This is how you legally front-run a customer,” I was told.

Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.

Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.

The logic here was very simple.

Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.

Or maybe a client old boy network picked up some valuable insider information.

(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.

So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.

This is known as a Primary Parallel Trade.

This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continues to this day.

Whenever you buy one thing, you buy another related thing as well, which might do considerably better.

I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.

I asked if this kind of legal front running happened on their desk.

“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.

Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).

I was puzzled. Why palladium?

Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and have been required for every U.S. manufactured car since 1975.

Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.

And here’s the sweetener.

Palladium trading is relatively illiquid.

So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your boring old parallel (F) trade.

This is known in the trade as a Secondary Parallel Trade.

A few months later, Morgan Stanley sent me to an investment conference to represent the firm.

I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.

He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.

You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).

Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.

He answered “Abso******lutely,” as was his way.

But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.

In the case of palladium, that would be Russia (RSX) followed by South Africa (EZA), which together account for 74% of the world’s total production.

Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.

I could go on and on.

If you ever become puzzled or confused about a trade alert I am sending out (Why on earth is he doing THAT?), there is often a parallel trade in play.

Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.

The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.

Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.

Oh, and Eastman Kodak (KODK) went bankrupt in 2012.

However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.

You could build chains a mile long simply based on how well Apple (AAPL) is doing.

And guess what? There is a new parallel trade in silver developing. For whenever someone builds a solar panel anywhere in the world, they are using a small amount of silver for the wiring. Build several tens of millions of solar panels and that can add up to quite a lot of silver.

What goes around comes around.

Suffice it to say that parallel trading is an incredibly useful trading strategy.

Ignore it at your peril.

 

 

 

 

Sometimes Markets are Hard to Figure Out

October 16, 2020/by MHFTR
https://www.madhedgefundtrader.com/wp-content/uploads/2019/03/John-Thomas.png 337 325 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2020-10-16 07:02:392020-10-15 20:06:17How to Gain an Advantage with Parallel Trading
Mad Hedge Fund Trader

October 14 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the October 14 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you think Interactive Brokers (IB) will give better executions?

A: No, these executions are all done by identical computers with identical programs now, across eleven differences of electronic exchanges. It’s like trying to decide whether to buy Exxon or Mobile gas. It’s all the same stuff. The only real difference in brokers these days is in customer service; and you really have to shop around there and find what you like. Even on customer service, most brokers have cut back staff to a minimum. In the end, the only difference among brokers may be “hold” times.

Q: What are your thoughts on Xpeng, Inc. (XPEV), the Chinese electric car manufacturer?

A: The Chinese have actually had electric cars longer than Tesla (TSLA) has and I have visited their factories in China, like BYD Auto (https://en.wikipedia.org/wiki/BYD_Auto). The problem has always been quality—the batteries tend to catch on fire, the cars fall apart—and that’s why they have never exported an electric car to the U.S. I don’t expect that to change. What’s more likely is Tesla building more factories in China, where they overwhelmingly have the technology, brand, and quality lead. I don’t think any electric car company can threaten Tesla now that they’re so far ahead.

Q: Is it a good time to buy the iPath S&P 500 VIX Short Term Futures ETN (VXX)?

A: No, because you only make money on the (VXX) when you get a volatility increase almost immediately after you buy it. So, if you have some great insight on the next volatility explosion, try it; otherwise, the time decay will kill you. By the way, everyone knows there is going to be a presidential election in three weeks so it’s already in the price.

Q: What is the likelihood of a financial transaction tax, and how would it affect our trading?

A: It wouldn’t hurt our trading, because we’re mostly small fry. It would wipe out high-frequency trading where they’re trading for a penny with no transaction costs. And that, in fact, would be the goal: to wipe out high-frequency trading. Unfortunately, they’re about 80% of the market now, so I’m not sure who would step in and fill in that space. But there’s always someone.

Q: What about Moderna (MRNA)?

A: Yes, I like it for the long term. I think next year will be another golden age for biotech, and they have had a great rally so I’d be looking to buy on dips. MRNA is certainly going to participate. After Corona, there are 100 other diseases they could be working on. It’s not a COVID-19-only story, which is what some of the short sellers got wrong.

Q: How far does Gold (GLD) go down before it goes up?

A: Probably not much more; we have had a decent 10% correction. I was actually thinking about buying gold today, but I also hate leaning into a downtrend. So, any downtrends are temporary, we’re looking at new highs in gold next year. This is a QE (quantitative easing) trade, not a risk-off trade like it used to be. So, the continuation of QE for years means that gold goes higher.

Q: When is it time to trade bonds (TLT) again?

A: Bonds just had their narrowest trading range in years in the last month. We only want to play on the short side; it broke down last week so we don’t want to do anything here.

Q: Is a 1% drop in Advanced Micro Devices (AMD) a dip?

A: No, a 10% drop in AMD is a dip. Buying a 1% drop is a chase, which is an invitation to a lot of pain.

Q: Have SPACs (Special Purpose Acquisition Corporation) replaced IPOs?

A: I think SPACs are one of the greatest scams of all time. Everybody will get ripped off after paying enormous fees, and once these things go illiquid, no one will be able to get out, so I would not chase the SPAC game. They are only created to dodge the investor protections in the IPO process, I’ve seen too many of these fads happen over the last 50 years. They always end in tears.

Q: I think there will be another surprise Trump win similar to 2016. How would the market react to a Trump win?

A: It would crash because the market has built in a Biden win and chased up Biden sectors. So, if that doesn’t happen, the market has to give up all those gains and reorient itself. Trump had a 2-3-point polling deficit last time, and now he has to overcome a 17-point deficit or whatever the number is depending on the poll you look at. So, I don’t think so. Remember, Trump only won the election by 78,000 votes in three states. The 220,000 who have died from the pandemic are definitely NOT voting for Trump, nor are their 10X family members. That’s 2.2 million votes lost. Remember, the Corona death rate in red states is far higher than in blue states.

Q: Do you think a Bollinger Band squeeze is forming in Tesla right now?

A: Yes, even though this stock has had a prolific run, it looks like it wants to go higher. I wouldn’t go short.

Q: What about over issuance of US debt?

A: Any concerns about over issuance of debt won’t hit for a while because the Fed is going to keep the short-term rates at zero, which will anchor everything else at low levels. The initial heat will be felt in the ten- and 30-year bonds where you should be permanently short.

Q: Reminder that 4 years ago, you said a Trump win would crash the market.

A: Yes, I did say that, and it did crash the market—it dropped 1,000 points overnight and made it all back the next morning. I spent that entire night rebuilding portfolios which then had a massive run, so I remember that very well. That is the only election I was wrong on in 50 years. So, the lesson is don’t bet against the guy who’s only wrong once in 50 years and count on him being wrong again. There are hundreds of data points now which show that Trump has no chance of winning and he’s acting in a way that backs that up.

Q: Is there a second COVID wave priced in yet?

A: No, the way these things work is scientists predict waves, traders say no it will never happen, then it happens and the traders puke out. And if that happens, we will know that is the buying opportunity of the century because that is exactly what we got on the last puke out in March. And yes, I was wrong; I said the stocks would double in two years and instead they doubled in three months.

Q: Do you think a real estate bubble is forming?

A: Yes, but it may not pop for another 10 years because we have 85 million millennials trying to buy housing right now, with interest rates near zero. I just refinanced my home at 2.75%. And only 65 million Gen Xers have homes to sell them, which is being expressed in higher home prices. That’s why I love the homebuilders (ITB).

Q: What about ProShares Ultra Short S&P 500 2X bear ETF (SDS)?

A: I would bail on that because the long-term trend is still up. Dow 120,000 here we come! You only want to use the (SDS) on short term dips, and then come out at the bottom.

Good Luck and Stay Healthy

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

October 15, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2017/06/john-star-wars-e1498514971937.jpg 415 310 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-10-15 13:02:202020-10-15 13:57:13October 14 Biweekly Strategy Webinar Q&A
Mad Hedge Fund Trader

Google’s Major Breakthrough in Quantum Computing

Diary, Newsletter, Research

I have been following quantum computing since they moved from the theoretical to the practical about five years ago.

The reason is very simple. They promise to bring a 1 trillion-fold increase in computing power at zero cost, promising to solve in seconds some for the world’s most vexing problems.

They also have the potential to ramp the stock market up at least ten times over the next decade and bring on a new golden age. No kidding!

Last week an academic paper leaked and was quickly withdrawn suggesting that Google has accomplished a major breakthrough in the field.

Google claims to have built the first quantum computer that can carry out calculations beyond the ability of today’s most powerful supercomputers, a landmark moment that has been hotly anticipated by researchers.

A paper by Google’s researchers was briefly posted earlier this week on a NASA website before being removed, claimed that their processor was able to perform a calculation in three minutes and 20 seconds that would take today’s most advanced classical computer, known as Summit, approximately 10,000 years. Yikes!

The researchers said this meant the “quantum supremacy”, when quantum computers carry out calculations that had previously been impossible, had been achieved. This dramatic speed-up relative to all known classical algorithms provides an experimental realization of quantum supremacy on a computational task and heralds the advent of a much-anticipated computing paradigm. This experiment marks the first computation that can only be performed on a quantum processor.

The system can only perform a single, highly technical calculation, according to the researchers, and the use of quantum machines to solve practical problems is still years away. But the Google researchers called it “a milestone towards full- scale quantum computing”.

They also predicted that the power of quantum machines would expand at a “double exponential rate”, compared to the exponential rate of Moore’s Law, which has driven advances in silicon chips in the first era of computing. That means a potential doubling of computing power every nine months with a halving of cost.

While prototypes of so-called quantum computers do exist, developed by companies ranging from IBM (IBM) to start-ups such as Rigetti Computing, they can only perform the same limited tasks classical computers can, albeit quicker. There is also a huge problem accessing stored data. Quantum computers, if they can be built at scale, will harness properties that extend beyond the limits of classical physics to offer exponential gains in computing power.

A November 2018 report by the Boston Consulting Group said they could “change the game in such fields as cryptography and chemistry (and thus material science, agriculture, and pharmaceuticals) not to mention artificial intelligence and machine learning . . . logistics, manufacturing, finance, and energy”.

Unlike the basic binary elements of classical computers, or bits, which represent either zeros or ones, quantum bits, or “qubits”, can represent both at the same time. By stringing together qubits, the number of states they could represent rises exponentially, making it possible to compute millions of possibilities instantly.

Some researchers have warned against overhyping the quantum supremacy, arguing that it does not suggest that quantum machines will quickly overtake traditional computers and bring a revolution in computing. Led by John Martinis, an experimental physicist from the University of California, Santa Barbara, Google first predicted it would reach quantum supremacy by the end of 2017. But the system it built, linking together 72 qubits, proved too difficult to control. It eventually revamped the system to create a 53-qubit design it codenamed Sycamore.

The system was given the task of proving that a random-number generator was truly random. Though that job has little practical application, the Google researchers said that “other initial uses for this computational capability” included machine learning, material science, and chemistry.

“It’s a significant milestone, and the first time that somebody has shown that quantum computers could outperform classical computers at all,” said Steve Brierley, founder of quantum software start-up Riverlane, who has worked in the field for 20 years and is an adviser on quantum technologies to the UK government. “It’s an amazing achievement.”

To illustrate where we are with Quantum computers today, think of it as 1945, when only five mainframe computers existing in the world, all in the US and England. That’s when IBM founder Thomas Watson famously predicted that “The total market for computers is five.”

Oops.

October 14, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/10/mainframes.png 486 864 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-10-14 07:02:252020-10-14 09:13:58Google’s Major Breakthrough in Quantum Computing
MHFTR

Coffee With Ray Kurzweil

Diary, Newsletter, Research

After spending a half-century in the investment business, I see all decisions boiling down to a single issue: Artificial Intelligence.

Speaking to people at the local PTA, American Legion, the VFW, the Commonwealth Club, people sitting next to me at high school football games, and even my own readers, this is the impression I get. AI is rapidly working its way into every aspect of our lives. But then, I live in Silicon Valley where everyone works in tech or in supporting service industries.

Companies that lead with AI, such as Google (GOOG), Amazon (AMZN), Facebook (FB), and Microsoft (MSFT) will prosper mightily. Those that don’t will disappear.

Technology companies now comprise 26% of U.S. stock market capitalization and 50% of corporate profits. They are on their way to 100% on both counts. Other industries may see the occasional brief, frenetic stock market rallies, which will quickly fade away.

Investing now is really ALL about technology with the exception of biotech and healthcare, which you really can consider “soft” technology.

So, I thought it timely to catch up with my old friend, Dr. Ray Kurzweil, head of engineering at Google (GOOG), the co-founder of the Singularity University, and an early AI evangelist.
 
A decade ago, Kurzweil pitched Google co-founder Larry Page for a venture capital investment in an AI start-up. Larry responded by buying the entire company, even though it was only two weeks old. That brought Kurzweil in-house and gave him first call on Google’s prodigious resources. 

To understand the recent spate of AI breakthroughs, you have to go back two years ago and see how a computer beat a human at the traditional Chinese game of Go. Long a goal of AI developers, Go is the most complex game ever played by humans, with 324 squares (18 X 18) and 361 stones. That means there are 2.08 X 10 to the 170th power possible moves, or more than double the number of electrons in the universe.

Scientists downloaded all known online Go moves in history, of which there were about 1 million. They then programmed a superfast mainframe to simulate 1 billion more Go moves. After that, beating all humans was a piece of cake.

You can apply this approach to more than just games. Google’s Waymo autonomous driving division let cars drive themselves 8 million miles and then simulated another 1 billion miles. That’s why they are so far ahead in the field.

You can also employ the same strategy when asking computers to identify new drugs by running simulations against a decoded human genome. The possibilities boggle the mind.

And the stock market? How about the accuracy of the Mad Hedge Market Timing Index, which takes market data from that last 100 years and then simulates another 1,000 years on top of that. And you wonder why it’s always right, and why I’m up 30% this year.

The fruits of those labors are found today in many Google services, such as Google Assistant and Google Home, which are growing smarter by the day. “Semantic Search” is the order of the day whereby searches are made on the basis of meaning and context, instead of my keywords alone. I work with Google all day long and the progression has been nothing less than astounding.

Just around the corner are “Smart Replies.” Google will be able to read 120,000 books, or 600 million sentences, in ½ second, and come up with the best three possible answers to every question of yours. If you’re willing to wait a few minutes, you can get the best three answers from every book ever written.

The term “AI” was coined at a famed conference at Dartmouth College in 1956. Don’t be intimidated. AI is simply superfast pattern recognition that any off-the-shelf Excel spreadsheet can accomplish done on ever faster supercomputers.

Kurzweil believes computers will pass the Turing Test by 2029, when their answers to any questions will be indistinguishable from a human. Miniaturization is another exponential trend that will place human intelligence on any smartphone by the 2030s.
 
Create a bionic link between your smart phone and your brain and the “singularity” is here, which Kurzweil believes will take place by the 2040s.

Kurzweil is a firm believer of the “Law of Accelerating Returns,” whereby the productivity of technology doubles every year. Costs drop by the similar amount, creating a radical deflation.

He argues that modern economic theories are broken, and I have argued this myself in the past. So much of technology’s output is free, and therefore immeasurable, that true GDP growth has been wildly underestimated.

And you wonder why inflation has been near zero for a decade, while the value of your home has doubled, and the efficiency of your cell phone has improved by a trillion-fold for a lower real price. Kurzweil expects 5 billion cell phones to be in circulation by 2020.

Moore’s law, where semiconductor price/performance doubled every year, reached its theoretical limits in 2016. All of the growth in processing power since then has been due to “3D Stacking,” where layers of processors are piled one on top of the other. The next generation of processors will see a once-unimaginable 96 layers.

And if you think this is all very interesting, wait a decade or two until we get quantum computers, which will increase computing power by a trillion-fold. Quantum computers rely on the infinite number of directions electrons can spin, rather than the simple on or off gates of traditional legacy computers. To learn more about quantum computing, please read my last piece on the subject by clicking here.

Sometime in 2019, Kurzweil published a sequel to his last book called “The Singularity is Nearer.” It no doubt was the AI blockbuster of the year.

Before that, he launched into fiction for the first time, publishing “Danielle” in January, which is about a girl who solves all the problems of the world by the age of 22 with the tools we have available to us today. To learn more about this project and to get a copy of the book, please visit www.danielleworld.com.

 

Go is a Piece of Cake if You can Simulate a Billion Moves

October 13, 2020/by MHFTR
https://www.madhedgefundtrader.com/wp-content/uploads/2018/09/Game-image-2-e1537288013322.jpg 303 400 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2020-10-13 10:02:402020-10-13 09:54:05Coffee With Ray Kurzweil
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